Does Algorithmic Trading Improve Liquidity in Emerging Markets? Empirical Evidence from Thailand

Abstract

This study explores the impact of algorithmic trading (AT) on liquidity in Thailand, as it affects both investors’ welfare and the cost of capital for firms. Empirical studies on this topic in emerging markets are scarce. A panel data analysis and two-stage least square regressions on the stocks of the SET100 listed on the Stock Exchange of Thailand from March to December 2016, were used to establish the relationship between AT and liquidity. The results showed that AT causes liquidity to deteriorate by enlarging the effective half spread, decreasing share turnover, increasing Amihud’s illiquidity estimate, and lowering the liquidity ratio. Various methods were employed to alleviate endogeneity issues. The results indicated that liquidity declines due to information asymmetry. This study was the first to investigate the effect of AT (initiated by institutional vs. foreign investors) on liquidity, finding that AT initiated by foreign investors plays a larger role in decreasing liquidity in the short term, while AT initiated by institutional investors has a more long term effect.